Energy Prospectus

The Sweet 16 was down 2.74% last week and is now down 0.28% year-to-date. The S&P 500 Index was up 0.12% last week and is now up 2.62% YTD.

We are in a bit of an information void right now waiting for Q4 results and updates on 2017 CapEx programs.

AR, DVN, NBL and PXD were up slightly last week. CLR and SM had the biggest dips.

First Call price targets continued to drift up, which is a good sign. First Call's price targets are the average of what analysts submit to Reuters.

Jan. 27: Range Resources (RRC) reported initial results on step-out Terryville wells, of which each encountered gas-in-place similar to the Vernon Field; initial production rates on two of the three wells were above to in line with IPs in the core Terryville field; positive read-through for WRD. Range also reported an 11% increase in proved reserves (ex-A&D), with PDPs up 14% and development costs coming in at $0.34/Mcfe.

Jan. 31: SM Energy (SM) announced eight new wells in Howard County including the top-performing Tackleberry Wolfcamp A well at a 2,262 boe/d IP30 (ranks #1 in the county per 1,000 ft. lateral). Seven of the eight wells rank in the top quartile in Howard County on this metric.

Feb. 1: Antero Resources (AR) reported 15.4 Tcfe (39% liquids) of proved reserves at YE16, up 16% y/y, with all-in F&D cost of $0.52/proved Mcfe, down 65% y/y.

PXD is expected to report Q4 results next week and then results will be pouring in over the next two weeks. My primary focus will be on updating my Sweet 16 forecast models as soon as I can. I will get to the small-caps when I have time.

An updated Sweet 16 spreadsheet will be posted to the EPG website late today.

My next podcast will come be sent to EPG members late Thursday or on Friday.

Diamondback Energy (FANG) already trades at a high multiple of operating cash flow per share, but I am keeping it in the Sweet 16 because it has stunning production and proven reserve growth locked in.

The company recently made an acquisition from Brigham Resources that effectively doubles its Tier 1 acreage position in the Permian Basin. The acquired acreage includes de-risked acreage by more than 48 producing horizontal wells drilled by Brigham across four distinct intervals.

Here are just a few more highlights of this acquisition:
• Production of 9,482 boepd from 64 gross wells.
• 1,200 net identified horizontal drilling locations with upside from additional zones and/or down-spacing.
• Stacked pay development with four zones de-risked, and several upside zones in Bone Spring and Wolfcamp.
• Continuous acreage set up for long lateral development and efficient infrastructure build-out, which will lower F&D costs per boe
• Attractive acquisition cost of $24,224/net acre.
• Midstream assets are already in place, with opportunity for organic build-out.

FANG expects to spend between $700 and $900 million on its 2017 capital program and run as many 10 rigs in the Permian Basin, split between the Midland and Delaware Basins. The company expects its 2017 production to be between 64,000 boepd and 73,000 boepd. Although I expect actual production to be at the high end of that range, I am using the midpoint in my forecast model. Production should jump 13,000 to 15,0000 boepd from Q1 to Q2 2017.

Do you have any idea what's going on with CRZO? The analysts have a target of $47.

How low can GPOR go looks like headed to teens

Carrizo Oil & Gas (CRZO) is not in the Sweet 16, but it definitely qualifies. It has double digit production growth locked in.

Gulfport's production was up 31.5% year-over-year in 2016 and their guidance is for production to increase 45% to 50% YOY in 2017. It is a "gasser" so not getting much love from Wall Street these days. Over 60% of their 2017 ngas production is hedged with SWAPS at $3.17/MMBtu. If ngas price moves over $3.50/MMBtu in Q4 (my forecast), it will be very bullish for GPOR. Gulfport's natural gas production is expected to grow from 688,719 mcf per day in Q4 2016 to approximately 990,000 mcf per day in Q4 2017.

From John White at Roth Capital (February 6, 2017):

Our net asset value and target price are based on proved and probable reserves, financial position, and historical and expected drilling results. Our price target is $130 and our Buy rating is maintained.

As previously reported, FANG announced that it has entered into an agreement to acquire all the assets of privately owned Brigham Resources Operating, LLC and Brigham Resources Midstream, LLC for a purchase price of $2.43 billion, consisting of $1.62 billion in cash and 7.69 million shares of FANG common stock.

We like the transaction and we note this management and technical team have a successful record of acquisitions in the highly competitive Midland Basin, and in our view this experience and skill set will accrue to this Delaware Basin deal and future development of this large property package.

The release date has not been announced for the upcoming 4Q and full year 2016 earnings press release. However, in the release we expect FANG to present a plethora of information regarding the Delaware Basin properties, including updated type curves, well locations, and drilling and development plans. Given FANG’s successful operating history, in our view, we expect most of this data to be positive and serve as catalyst for the stock.

We have incorporated actual WTI crude oil and Henry Hub natural gas prices for 4Q 2016. Accordingly, our estimates for 4Q 2016 EPS/CFPS/ EBITDA increase from $0.39/$1.38/$108.8 million to $0.42/ $1.44/$112.8 million. Our estimates for EPS and EBITDA are lower than consensus estimate of $0.53 and $116.4 million. Our estimate of CFPS of $1.44 is higher than the consensus estimate of $1.35. [My CFPS estimate for Q4 is $1.38. - Dan]